Inventing a new product, method or device is not easy. As most inventors will attest, it takes both creativity and tenacity. But even after you invent an innovative new product, your work is not done. How will you ultimately profit from that invention? The first step is usually to obtain a patent on the invention. And the next step is to decide whether you should license (or sell) the invention to a third party, or whether to manufacture and sell it yourself.
Many types of inventions are innovative and perhaps lucrative. You may seek to patent such inventions to prevent competitors from making and selling the sale product. Under the Patent Act (35 U.S.C. § 1 et seq.), the U.S. Patent and Trademark Office (USPTO) will grant a patent to an inventor, which is essentially an exclusive property right over the invention. Patents are normally valid for 20 years from the date on which the application for the patent was filed, meaning that you could prevent competitors from using "your" invention for two decades.
Not every "invention" is patentable, however, even if the invention is interesting or helpful. For example, mathematical formulas, laws of nature, newly discovered substances that occur naturally in the world, and purely theoretical phenomena—such as a scientific principle like superconductivity—are considered unpatentable.
Only inventions that meet a certain checklist of qualifications will be granted a patent. There are several types of patents under U.S. law, and you need to be sure that your invention fits into one of them.
It is true that patent attorneys, who can help you go through the steps to obtain a patent, are sometimes expensive. Fortunately, you do not always need an attorney to obtain a patent. If your invention is simple enough, and no other person or entity challenges your claims, you can handle the application process on your own. For more on this, read Guide to Getting a Patent on Your Own. And for a comprehensive rundown of every step in the patenting process, see Patents for Beginners, by David Pressman and Richard Stim (Nolo), which includes sample forms and letters, resources, and a glossary of terms.
Typically, employee-inventors who invent something in the course of their employment are bound by employment agreements that automatically assign all rights in the invention to the employer. While smart research and development companies give their employee-inventors bonuses for valuable inventions, this is a matter of contract rather than law.
Even without a written employment agreement, an employer may own rights to an employee-created invention under the "employed-to-invent" doctrine. If an inventor is employed—even without a written employment agreement—to accomplish a defined task, or is hired or directed to create an invention, the employer will own all rights to the subsequent invention. Most companies prefer to use a written employment agreement because it is more reliable and easier to enforce than an implied agreement.
Both written employment agreements and the "employed-to-invent" rule allow the employer to become the owner of all patent rights. An employer may also aquire a "shop right," rather than ownership of patent rights.
Under a shop right, the employee-inventor retains ownership of the patent, but the employer has a right to use the invention without paying the employee-inventor. A shop right can occur only if the employee-inventor uses the employer's resources (materials, supplies, time) to create an invention. Other circumstances may be relevant, but use of employer resources is the most important criterion.
For example, let's say Robert is a machinist in a machine shop and, using his employer's resources, invents a new process for handling a particular type of metal. If Robert has not signed an employment agreement giving his employer all rights to the invention and if Robert was not employed to invent, Robert can patent and exploit the invention for himself. His employer, however, would retain the right to use the new process without having to pay Robert.
A license is written authorization to exploit an invention. An inventor usually authorizes a manufacturer (the licensee) to make and sell the invention in exchange for paying the inventor royalties. The royalties may be a percentage of the net revenues or may be a payment for each invention sold. Alternatively, the inventor may sell all of the rights to the invention for a lump sum or royalties (known as an assignment).
A license may be exclusive (if only one manufacturer is licensed to develop the invention) or non-exclusive (if a number of manufacturers are licensed to develop it). The license may be for the duration of the patent or for a shorter period of time. The territory is usually limited to the geographic extent of the patent protection. For example, the owner of a U.S. patent will license the rights for the U.S. but will not be able to exploit beyond that patent territory.
The licensee may in turn license other companies to market or distribute the invention. The extent to which the inventor will benefit from these sub-licenses depends on the terms of the main agreement between the inventor and the licensee.
In some cases, an inventor or a company may trade licenses with other companies—called cross-licensing—so that companies involved in the trade will benefit from each other's technology. For example, assume that two computer companies each own several patents on newly developed remote-control techniques. Because each company would be strengthened by being able to use the other company's inventions as well as its own, the companies may agree to swap the licenses of their respective inventions.
For more on the ins and outs of licensing your invention, see Should You License or Manufacture Your Invention?.
Licensing (or selling) your invention to a third party might not seem appealing. After all, you would lose a significant cut of the profit from the product, method, or device that you created. Aren't you leaving money on the table by not manufacturing and selling the invention yourself?
Maybe. Some inventors do start new companies in order to develop and market their patented inventions. However, remember that manufacturing and selling require very different skills and resources than inventing. Inventors might be engineers or scientists, but often lack experience in accounting, supply chain operations, advertising, and retail—the knowledge one needs to bring a product to market.
Also consider the costs of production. If you decide not to license your invention to a third party, how will you produce large quantities of your product? In many cases, profitable inventions are made from metals and plastics, and require significant factory resources to mass produce. You may need to obtain zoning variances or various licenses to begin production. Unless you have or can obtain the capital to finance that sort of endeavor, you should proceed with caution.
In short, the majority of inventors would rather invent than run a business. More often, an inventor patents the invention but makes arrangements with an existing company (or companies) to develop and market it. This arrangement usually takes the form of a license, as discussed above, by which the developer is authorized to commercially exploit the invention in exchange for paying the patent owner royalties.